As markets continue to shake and the Federal Reserve takes a more subdued tone, where does opportunity lie for short-term bonds? WealthManagement.com spoke with Joe D’Angelo, Head of Money Markets at PGIM Fixed Income, about his outlook for the short-term market and what that means for PGIM’s recently launched Ultra Short Bond ETF (PULS).
Q: What were the catalysts for the strong flows into ultra short bond funds in 2018?
A: In 2018, the Morningstar Ultrashort Bond category saw $44.2 billion in net inflows ranking it #1 for all fixed income categories as of 12/31/18. This strong demand was driven in part by short-term yields moving higher as the Fed continued to tighten monetary policy, a challenging first quarter of 2018 for traditional fixed income strategies, and increased volatility in the equity markets. These factors helped draw attention to the value proposition offered by ultra short bond funds; competitive yields with low principal volatility.
Q: How have short-term bonds performed in recent months?
A: From a relative perspective, the fourth quarter of 2018 was difficult for the short end of the bond market as spreads widened across 0- to 3-year bonds. This part of the bond market is largely driven by supply-and-demand factors. In the fourth quarter, it’s typical to see a technical shift as issuers and investors make year-end moves to shore up their balance sheets or their portfolios. This past year, however, the supply-and-demand dislocation was more severe than most market participants anticipated, which led to more volatility among short-term bonds.
Q: What is your outlook for short-term bonds in 2019?
A: In late 2018, markets had the notion that we were breaking free from the past decade of historically low rates, resulting in nervousness at the front end of the market. The fourth quarter was tough sledding, but coming into January the Fed has given us a fresh start with a more dovish tone. Since there may be less Fed activity this year, we look for a more favorable technical backdrop, which would be positive for the short end of the market.
Q: Where are you seeing opportunities?
A: Following the financial crisis, the SEC imposed changes to money market products, shrinking the investment opportunity set for these types of strategies. Today, the opportunity lies in going out a little longer in maturity and diversifying into different sectors beyond banks and finance companies, which typically comprise the bulk of traditional money market funds. With PULS, we can invest in maturities longer than money market funds and into other sectors of the fixed income market such as structured products and industrials.
Q: What is the benefit of an active approach in this market?
A: When markets become volatile, you learn through experience how to position a portfolio to take advantage of potential opportunities. For instance, when we see a supply dislocation in the market, an active approach can capture opportunities related to that dislocation.
Q: How does PULS fit with an investor’s larger fixed-income strategy?
A: PULS can be used by investors to fulfill short-term needs with intra-day liquidity, while also providing a competitive level of income and diversification beyond traditional money market funds.
Past performance does not guarantee future results and current performance may be lower or higher than the past performance data quoted. The investment return and principal value will fluctuate and shares when sold may be worth more or less than the original cost. For the most recent month-end performance go to pgiminvestments.com.
Gross operating expenses: PULS, 0.15%. Expenses are as of the most recent prospectus. Inception Date: PULS, 4/5/2018. May not be available at all firms.
All data is unaudited and subject to change. Holdings/allocations may vary. This is not a recommendation to buy or sell any security listed. Totals may not sum due to rounding. Negative holdings reflect outstanding trades at period end. Largest holdings based on issuers. Largest holdings excludes cash, cash equivalents, money market funds and enhanced cash strategies. This is not a recommendation to buy or sell any security listed.
PULS is an actively managed exchange traded fund (ETF) and, thus, does not seek to replicate the performance of a specified index. The Fund is not a money market Fund and does not seek to maintain a stable net asset value. As an ETF, the Fund’s shares trade on an exchange and are subject to ETF shares trading risk, including that the Fund’s shares may trade at a premium or discount to net asset value, during periods may become less liquid, potential may lack an active trading market which may result in significant losses if you sell your shares of the Fund during these periods; authorized participant concentration risk, since the Fund has a limited number of intermediaries exit the business or are unable to or choose not to proceed with creation and/or redemption orders with respect to the Fund and no other authorized participants creates or redeems, shares of the Fund may trade at a discount to NAV and possibly fact trading halts and/or delisting; cost of buying or selling shares, when you buy or sell shares of the Fund through a broker, you will likely incur brokerage commission or other charges; and cash transaction risk, unlike other ETFs, the Fund is subject to new/small fund risk given the fund’s recently commenced operations and limited operating history. Fixed income investments are subject to credit, market, and interest rate risks, and their value will decline as interest rates rise; call and redemption risk, where the issuer may call a bond held by the Fund for redemption before it matures and the Fund may lose income and extension risk, where the issuer may repay a fixed income security more slowly than expected, extending the effective duration of these securities. The Fund’s fixed income investments include variable and floating rate bonds, which are subject to credit, market and interest rate risk. The Fund may invest in foreign securities, which generally involve more risk than investing in US issuers, including political, legal, and economic uncertainty; mortgage-backed and asset-backed securities, which are subject to prepayment, extension, and interest rate risks; and US Government and Agency Securities Risk, which may carry market, interest rate and credit risks, may not be insured or guaranteed by the full faith and credit of the US Government and may limit the Fund’s potential for capital appreciation. The Fund may not be invested in all sectors at a given time. The risks associated with the Fund are more fully explained in the prospectus and summary prospectus.
Consider a fund’s investment objectives, risks, charges, and expenses carefully before investing. The prospectus and summary prospectus contain this and other information about the fund. Contact the PGIM Investments Sales Desk at (800) 257-3893 to obtain the prospectus and summary prospectus. Read them carefully before investing.
Funds are distributed by Prudential Investment Management Services LLC (PIMS). PGIM Fixed Income is a unit of PGIM, Inc. (PGIM), a registered investment advisor. PIMS and PGIM are Prudential Financial companies. © 2019 Prudential Financial, Inc. and its related entities. PGIM and the PGIM logo are service marks of Prudential Financial, Inc. and its related entities, registered in many jurisdictions worldwide.
This material is being provided for informational or educational purposes only and does not take into account the investment objectives or financial situation of any client or prospective clients. The information is not intended as investment advice and is not a recommendation about managing or investing your retirement savings. Clients seeking information regarding their particular investment needs should contact a financial professional.
INVESTMENT PRODUCTS | Are not insured by the FDIC or any federal government agency | May lose value | Are not a deposit of or guaranteed by any bank or any bank affiliate
1015877-00001-00 Expiration: 7/31/2019 For financial professional use only. Not for use with the public.
